Investment managers are flocking back to Chinese exchange-traded funds (ETFs) in 2024, leading to a significant outperformance compared to the S&P 500. This resurgence in interest comes after a challenging period for Chinese companies, with regulatory actions by China playing a crucial role in stabilizing the market following a $2 trillion sell-off in 2021. Overseas investors have also returned to reverse sharp outflows experienced in late 2023, while Chinese domestic investors have injected $28.5 billion into Hong Kong-listed stocks.
Shares in Chinese companies have experienced a remarkable turnaround, with some China-focused ETFs now surpassing the performance of the S&P 500. The market stimulus provided by the Chinese government has fueled a surge in investment in Chinese ETFs. According to Bloomberg, money manager investment in China was the highest among emerging-market countries for the week ended May 17, with inflows of $488 million.
Leading the charge is the iShares China Large-Cap ETF (FXI), boasting approximately $5.2 billion in assets and delivering a nearly 22% year-to-date return, compared to 11.5% for the S&P 500 as of late Tuesday. This ETF tracks the FTSE China 50 Index, offering investors exposure to the 50 largest companies trading on the Hong Kong Stock Exchange. Following closely behind is the iShares MSCI China ETF (MCHI), with a 13.6% return and $5.9 billion in assets.
The KraneShares CSI China Internet ETF (KWEB), valued at $6.5 billion, is another top performer, with a year-to-date gain of about 20%. Notably, Tencent Holding (TCEHY) and Alibaba Group (BABA) feature among the top three holdings of all three of these ETFs. For diversification, investors can turn to the Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR), which tracks the broader market but has yielded a 7% return so far in 2024.
Amid concerns of an economic slowdown, accumulated outflows from Chinese equities peaked at 218 billion yuan ($30.2 billion) in January of this year. However, this trend began to reverse in February following measures announced by Chinese authorities to stabilize markets and steer them away from multiyear lows. These measures included restrictions on securities lending and short selling, along with increased state-backed share purchases to counteract a $2 trillion loss in market cap from 2021 highs.
The effectiveness of these measures is evident as total outflows narrowed to about 100 billion yuan by early May. Chinese investors have also been actively engaging in Hong Kong-listed stocks, with total inflows reaching HK$223 billion ($28.5 billion) this year. Prominent investors have shown confidence in Chinese stocks traded in the U.S., with notable increases in their holdings. For instance, David Tepper’s Appaloosa Management more than doubled its Alibaba shares and Baidu holdings, while also adding significant positions in PDD Holdings and JD.com.
“Big Short” investor Michael Burry’s Scion Asset Management also increased its holdings in JD.com and Alibaba while initiating a new position in Baidu. The resurgence in interest and confidence from both domestic and international investors signals a positive outlook for Chinese equities moving forward.
In conclusion, Chinese ETFs are experiencing a resurgence in interest and performance, outpacing the S&P 500 and attracting significant investments from both domestic and international investors. The market stimulus provided by the Chinese government, coupled with regulatory actions to stabilize the market, has played a pivotal role in restoring confidence in Chinese companies. As investors worldwide return to Chinese equities, the outlook for Chinese ETFs remains promising, offering opportunities for growth and diversification in investment portfolios.
